q4 allocation report - milltrust gemma ucits
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4TH QUARTER 2014
MARKET REVIEW & ALLOCATIONS REPORT
MILLTRUST GEMMA UCITS MODEL PORTFOLIO
GLOBAL EMERGING MARKETS EQUITY
Funds: Milltrust Greater
China Fund Milltrust India
Fund Milltrust ASEAN
Fund Milltrust LatAm
Fund Milltrust Brazil
Fund
Existing Allocations
(as of Sept 30th): 21.0% 27.5% 19.5% 22.8% 9.1%
New Allocations:
23.5% 25.0% 19.5% 22.8% 9.1%
Action: Increase by 2.5% Decrease by 2.5% No Change No Change No Change
Summary: The China exposure remains at the low end of our optimal allocation range (24%-25%), whereas India shifts to the top of the range (15%-25%). Our exposure to ASEAN and Latin America as a whole remain on target.
Summary: China India ASEAN LatAm ex Brazil Brazil
Optimal Allocation:
29.2% 20.0% 19.1% 17.6% 14.1%
Range: 24%-35% 15%-25% 14%-24% 13%-23% 10%-20%
OPTIMAL COUNTRY ALLOCATIONS
4TH QUARTER 2014
ALLOCATIONS SUMMARY
FUND ALLOCATIONS
We use our model recommendations to shape our allocations to our underlying Funds.
The graph below shows the final output of our proprietary Strategic Regional Allocation Model (long-term) and Tactical Regional
Allocation Model (short- to medium- term). Both models are updated monthly.
29.2%
20.0% 19.1%17.6%
14.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
China India ASEAN LatAm ex-Brazil Brazil
Allocati
on %
Optimal Country Allocation Breakdown
GLOBAL EMERGING MARKETS EQUITY
Country Country/Region
Valu
ati
on
Mom
entu
m
Gro
wth
Dem
and
Consu
mer
Confi
dence
Exte
rnal
Bala
nce
Fore
ign
Exposu
re
Senti
ment
Fore
ign
Exchange
Moneta
ry
Policy
Politi
cal
Revie
w
Str
uctu
ral
Refo
rm
China Greater China
India India
Indonesia ASEAN
Malaysia ASEAN
Philippines ASEAN
Thailand ASEAN
Brazil Brazil
Chile LatAm ex Brazil
Colombia LatAm ex Brazil
Mexico LatAm ex Brazil
Peru LatAm ex Brazil
Regions Growth &
Opportunity Set Secular Trends Political Risk Economic Risk Financial Risk
China 1.55 0.68 -0.62 0.85 0.91
India 0.30 -0.39 -0.60 -0.81 -0.38
ASEAN 0.09 0.02 -0.13 0.15 -0.24
Brazil -0.81 0.10 -0.17 -0.60 0.20
LatAm ex Brazil -0.35 -0.12 0.48 -0.01 0.06
4TH QUARTER 2014
COUNTRY SCORECARDS
Trending downwards, Negative
Neutral Trending upwards,
Positive
TACTICAL REGIONAL ALLOCATION MODEL (TRAM)
STRATEGIC REGIONAL ALLOCATION MODEL (SRAM)
GLOBAL EMERGING MARKETS EQUITY
Country Short Term Outlook Assessment
China =
Recent data has shown that the pace of China’s recovery has slowed slightly but the economy is
still trending upwards with the possibility of more ‘mini stimuli’ to come as required; we do not
discount the prospect of interest rates or RRR cuts in the future. Valuations in China are still very
low with some clear upside as the recent government reforms start to take effect; these include
the ongoing anti-corruption drive, the SOE reform which will include partial privatization in a bid
to attract private investment and increase shareholder value and the Stock-Connect which will
start the integration of the exchanges within the Chinese territory. On the downside, we are still
concerned about the property market and are actively looking for signs that the market is
stabilizing.
India
India is no longer ‘fragile’. Its current account deficit has reduced to a manageable level, economic
and earnings growth are accelerating, there is a new wave of infrastructure projects on the agenda
and the ‘Modi effect’ is driving both foreign and domestic sentiment. Despite the run-up in
equities this year, the valuations are still at 10-year averages with P/E ratios still at half of what
they were at the peak of the market in 2007/2008. Whilst we are positive on India, we are closely
monitoring the government’s next actions as they will have to start delivering on their promised
reforms, particularly in the taxation and labour markets, in order for the stock market rally to be
sustainable. India’s food inflation is another highly sensitive and relevant issue in India given that
about 25-30% of India’s population spends more than half of its monthly household income on food.
Indonesia
Despite GDP growth recently slowing to its weakest pace in 19 quarters and its current account
deficit making it vulnerability to global monetary conditions, Indonesia is providing a lot of
medium term optimism. There is increasing noise about spending more money on infrastructure
and manufacturing which will help reduce Indonesia’s over-reliance on commodity exports,
reducing the fuel subsidies which should help ease the current account deficit, and implementing
some significant SOE, education and tax reforms. Consumer stocks should benefit as Indonesians’
spending power improve. There are a lot of positives here, some of which have already been
priced in the markets. We will also be carefully monitoring the funding and implementation of
these reforms.
Malaysia
Malaysia is the second fastest growing economy (tied with the Philippines) in Asia after China
with 2nd quarter growth of 6.4%. Much of this growth has been consumption-led which in turn
has been primarily funded by debt (household debt is very high at 86% of GDP). This is
unsustainable given the existing income levels so we expect some contraction. Especially as
Malaysia is also entering a tightening phase. In the meantime, doing business in Malaysia is
getting better as companies continue to benefit from the government’s mission to reduce
bureaucracy. The big agenda item is the government’s Goods and Services Tax to be applied from
next April. The aim is to significantly reduce the size of the shadow economy and provide new
sources of revenue for the government. There are risks to higher inflation here.
Philippines =
The Philippines continues to be one of the bright prospects in the region with strong growth (2nd
highest in Asia) providing the central bank with more leeway to adjust monetary policy and to
support growth by increasing spending. Whilst China and the other Asian economies (except
Malaysia) are loosening to stimulate growth, the Philippines are going in the opposite direction
with expectations of further rate increases. We expect the economy to continue to expand over
the coming quarters due to an increasingly competitive manufacturing base, higher exports
COUNTRY REVIEW & OUTLOOK
4TH QUARTER 2014
COUNTRY ASSESSMENTS
GLOBAL EMERGING MARKETS EQUITY
(electronics, agriculture), and strong local demand. Despite the strong macro picture, the
valuations are very expensive (nearly 2 standard deviations from long term average), so we will
proceed with caution.
Thailand
Thailand, which avoided a recession earlier this year, has provided some short-term optimism
with the improved political stability boosting consumer confidence (at a 13-month high) and
business sentiment. The new government will be adopting an expansionary fiscal policy to help
the economic recovery with structural reforms also expected. Whilst consumption and
investment have started to recover, exports remain weak and the political uncertainty will be set
to return once the junta steps aside in late 2015. Valuations are still high due to depressed
earnings, but earnings growth is anticipated.
Brazil =
Brazil provides a mixed bag of both negative trends (shrinking economy, high inflation, very tight
monetary conditions) and positive trends (record low unemployment, promise of market and
business friendly structural reforms). What is clear is that reform is desperately needed to
stimulate the economy. The upcoming election in October will provide a key catalyst for the future
of the economy. An opposition win would most likely lead to a sharp rise in the Brazilian stock
market and encourage businesses to invest and expand more. Should Dilma, the incumbent, win,
the markets will likely fall further as her market ‘unfriendly’ interventionist policies would be set
to continue. In reality, regardless of who wins, there will be challenging times ahead.
Chile
Chile’s economic growth has been on a downward trend led by a slowdown in consumption,
uncertainty around the impact of the recent fiscal reforms on future investment and growth and a
decrease in copper prices. We believe the reforms are a case of ‘short term pain, long term gain’;
the government’s new tax reform, for instance, is likely to improve Chile’s medium to long-term
outlook as the reform revenue gets re-invested into the economy. 2015 is likely to be a better year
as the economic deceleration bottoms out in 2H 2014.
Colombia
Despite the slowdown of the commodity boom which negatively impacted commodity-exporting
countries like Colombia this year, Colombia has outperformed its regional peers and has become
the fastest-growing of the major Latin American economies with consensus for next year’s growth
in the 5% range. A key driver for the coming years will be the country’s large infrastructure program
centered on building new roads. The prospect of a peace deal with the rebels, whose attacks on
oil infrastructure earlier this year significantly affected output, would also be a very welcome
development. Moody’s upgraded Colombia this year to Baa2 (same as Brazil).
Mexico
We have a positive outlook for Mexico as several indicators have shown a recovery in the economy.
Increasing demand from the US, an accelerating manufacturing sector, the opening of the energy
sector to private investments, forcing competition in the telecoms market as well as labour,
education and financial reforms will all provide the Mexican economy with a tailwind going into
next year. The forecasted growth for next year is 3.7%, following last year’s 1.1% and this year’s
target of 2.7%.
Peru
Peru, like Colombia, is a medium-sized commodity exporter with an open-market economy in Latin
America. Unfortunately for Peru, its main exports, gold and copper, suffered significantly from
weaker prices and softer demand particularly from Asia. Peru is now amidst the worst economic
deceleration in five years with possibility of entering in a recession. The Central Bank is likely to
continue a loosening monetary policy in the hopes of triggering the recovery process. Growth is
still likely to be around 4% which isn’t two bad these days, just not the 6-plus% that Peru has
enjoyed over the past decade.
GLOBAL EMERGING MARKETS EQUITY
Indonesia
Malaysia
Philippines
China
India
Chile
Colombia
Mexico
Peru
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0% 1% 2% 3% 4% 5% 6% 7% 8%
3 m
onth
change
Annual GDP Growth
GROWTH
Growth rates look the most attractive in Asia. Latin America, a continent of more commodity focused economies, has
felt more of the impact from the slowdown in the commodity boom.
Not listed below are Thailand (+0.4% GDP Growth, +180% change) and Brazil (-0.9% GDP Growth, -147% Change).
Chile and Peru) are commodity-focused economies
which suffered from the commodity slowdown.
Colombia, also a commodity-exporter, was less
impacted as oil and coal, their main exports, were
less affected.
The Central Bank of India forecasts a 5.5% GDP
growth for next year and the expectation is to not
need to lower interest rates to reach this target.
This is positive given India’s current ‘war on
inflation’.
VALUATION & MOMENTUM
Country Region Valuations Momentum
Price Earnings
Brazil Brazil Cheap Oversold Negative
Chile LatAm ex Brazil Cheap Neutral Neutral
Colombia LatAm ex Brazil Cheap Oversold Neutral
Mexico LatAm ex Brazil Neutral Neutral Neutral
Peru LatAm ex Brazil Neutral Oversold Negative
China China Cheap Neutral Neutral
India India Neutral Neutral Neutral
Indonesia ASEAN Expensive Neutral Neutral
Malaysia ASEAN Neutral Neutral Neutral
Philippines ASEAN Expensive Neutral Neutral
Thailand ASEAN Expensive Neutral Neutral
GLOBAL EMERGING MARKETS EQUITY
-20
0
20
40
60
80
100
120
140
India Indonesia Brazil China Malaysia Mexico Thailand Peru Chile Colombia Philippines
DEMAND
Manufacturing activity and industrial output can be a useful proxy for consumer demand, given how sensitive the
manufacturing sector is to consumption. We look at both Industrial Production and PMI numbers.
CONSUMER CONFIDENCE
This questionnaire focuses on the consumer’s current financial situation and on expectations about inflation, unemployment, wages and major purchases for the next 6 months. The value 100 indicates no evolution in consumer’s sentiment, a value over 100 indicates increasing confidence and a value under 100 indicates low expectations.
With very low unemployment, the Brazilian household is still
maintaining a relatively good standard of living.
Malaysia is at a turning point as household debt
reaches uncomfortable levels. We feel there is some
downside risk here.
The Mexican government’s first year in office was
unpopular, but we expect consumer confidence to
rise.
Indonesia
China
India
Brazil
Mexico
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
49 49.5 50 50.5 51 51.5 52 52.5 53
3 m
onth
change
PMI
Purchasing Managers' Index
Industrial Production
Latest Prior
Chile -4.1% 0.9%
Brazil -3.6% -7.1%
Thailand -2.7% -5.3%
Malaysia 0.5% 7.0%
India 0.5% 3.4%
Indonesia 1.4% 6.7%
Colombia 1.6% -0.6%
Peru 1.8% 2.0%
Mexico 2.1% 2.0%
China 6.9% 9.0%
Philippines 7.7% 10.8%
Despite the drop in Industrial
Production, China is still expanding,
albeit at a slower pace. The government
is on standby with more stimulus if
required.
The ‘Modi effect’ in India and the
‘Jokowi effect’ in Indonesia have
created a strong uplift in expectations
for higher standard of living.
Expansion Contraction
Incre
asi
ng c
onfi
dence
Low
expecta
tions
GLOBAL EMERGING MARKETS EQUITY
We look at the ‘FX reserves to short term external debt and current account balance’ ratio (the latter is known as a countrys’
gross external financing requirements) to anticipate each country’s ability to meet their foreign payments and debt obligations
and to ultimately assess their credit health.
Indonesia
Malaysia
Philippines
Thailand
China
India
Brazil
Chile
Colombia
Mexico
Peru
-10%
-5%
0%
5%
10%
15%
0% 200% 400% 600% 800% 1000% 1200% 1400%
3 m
onth
change
Fx Reserves / (Short Term External Debt - Current Account Balance)
(80,000)
(60,000)
(40,000)
(20,000)
-
20,000
40,000
60,000
80,000
Brazil Indonesia Mexico India Colombia Peru Chile
FDI vs Current Account
Current Account FDI
Given we are likely to enter a phase of tightening monetary conditions with the US looking more likely to tighten earlier
than expected, we are paying particular attention to countries with current account deficits which are likely to be more
vulnerable in these conditions.
However, we also look at the level of foreign direct investment versus current account deficits. A current-account deficit
is likely to be more manageable if it is financed by foreign-direct investment.
EXTERNAL BALANCE
Current Account (% of GDP)
Last 12 Months
Peru -4.96%
Colombia -3.59%
Brazil -3.49%
Indonesia -3.02%
Chile -2.34%
Mexico -1.95%
India -0.98%
Philippines 0.94%
China 1.77%
Malaysia 2.60%
Thailand 3.22%
India’s foreign-exchange reserves are near record highs
which should provide them with some protection should
there be a repeat of the EM turmoil. Meanwhile, India’s
credit rating outlook was raised to stable from negative
by Standard & Poor’s.
With the Indian economy recovering nicely this year,
we could expect to see a slight increase in the current
account deficit as India starts buying more machinery
and capital equipment to support the infrastructure
projects.
Brazil may be ‘fragile’ but it has a healthy FX reserve
balance to deal with sharp capital outflows.
Reduction of fuel subsidies which should help ease the
current account deficit in Indonesia.
FOREIGN EXPOSURE
GLOBAL EMERGING MARKETS EQUITY
Indonesia
Malaysia
Philippines
Thailand
China
India
Brazil
Chile
Colombia
Mexico
Peru
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
-5% 0% 5% 10% 15% 20%
3 m
onth
change -
Curr
ency
3 month change - Equity Market Index
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
Chile Indonesia Colombia India Peru Brazil Thailand Malaysia Mexico Philippines China
% C
hange in R
EER f
rom
3 y
ear
avg.
Whilst we do not hedge currencies, we do look at currency valuations to determine whether a currency is under- or over-
valued. We compare the weighted average of a country's currency relative to an index of 61 currencies adjusted for the
effects of inflation (Base year 2010), also known as the real effective exchange rate (REER). In the graph below we compare
the current REER to its 3-year average.
Overvalued
Undervalued
FOREIGN EXCHANGE
SENTIMENT
The blue circle below highlights countries with positive sentiment which is typically where we see an upward trend in markets
and currencies.
Positive Sentiment
The Indian Central Bank has repeatedly intervened, keeping
the rupee around the Rs60 per dollar mark. Expectations are
for the rupee to appreciate once the central bank stops buying
dollars.
Sentiment can change very rapidly in Brazil depending on the
election results. The incumbent would be market un-friendly.
GLOBAL EMERGING MARKETS EQUITY
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
Brazil Indonesia India Peru Thailand Mexico Chile China Colombia Philippines Malaysia
(GD
P G
row
th -
Policy R
ate
)
MONETARY POLICY
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Late
st M
onth
ly %
Country
Inflation Target Inflation (maximum)
Tighter Environment Looser Environment
We regularly monitor actual versus target inflation rates to help anticipate future monetary conditions and Central Bank
actions. Inflationary pressure leaves little room for looser monetary policy at home to offset rising global interest rates.
Both India and Brazil are at the top of their inflation target
zones with India looking to reduce inflation by another 2% by
the end of next year. Brazil find themselves in an unwelcome
phase of stagflation, increasing inflation and low growth.
On Sept 3rd, Brazil’s central bank kept the benchmark interest
rate unchanged at 11 percent for the third straight meeting.
The central bank expects inflation to start converging to 4.5%
in 2016 if monetary conditions are maintained. Brazil is
simultaneously plagued with low growth; expectations are for
1% growth next year. There is a consensus belief that
structural reform must be implemented to lift the country
out of the recession.
GLOBAL EMERGING MARKETS EQUITY
Country Election & Date Likely Win Who Won Mkt Friendly
Indonesia Parliamentary (Apr-14) Opposition
Colombia Presidential (May-14) Incumbent
India Presidential (Jul-14) Opposition
Indonesia Presidential (Aug-14) Opposition
Brazil Presidential (Oct-14) Too close to call
POLITICAL REVIEW
2014 was an important election year for the developing world. Nearly everyone voted this year and some countries even
voted twice.
We have highlighted below some of the key election results and assessed their market impact.
All the eyes of the world are on the Brazil election s in October. Neves is market friendly, Dilma (the incumbent) is not.
China
SOE Reform
Shanghai-Hong Kong Link
Malaysia
Tax Reform
Indonesia
SOE Reform
Education Reform
Tax Reform
Brazil
Financial
Reform
Infrastructure
Reform
Mexico
Labour Reforms
Education Reforms
Telecom/Media Reforms
Energy Reforms
Fiscal Reforms
Political Reforms
India
Railway Reform
Infrastructure Reform
Financial Reforms
Chile
Tax Reform
Colombia
Infrastructure Program
(New roads)
Structural reform is essential to boost productivity and therefore sustain growth. This year we are seeing a strong push by
some countries to carry out the necessary reforms, particularly, China, Indonesia, India, Brazil, Mexico and Chile.
STRUCTURAL REFORM
GLOBAL EMERGING MARKETS EQUITY
DISCLAIMER:
Milltrust International LLP is a subsidiary of Milltrust International Group (Singapore) Pte Ltd. and is authorised and regulated
by the Financial Conduct Authority in the United Kingdom. Milltrust International (Singapore) Pte. Ltd. is a wholly-owned
subsidiary of Milltrust International LLP. Milltrust International (Singapore) Pte Ltd has submitted a notification for Exempt
Fund Manager status to the Monetary Authority of Singapore, and in accordance with the changes to the regulatory regime for
fund management companies in force from August 2012 will supplement this notification during the prescribed transition period
to comply with the new rules. This document does not constitute any offer or invitation to purchase or subscribe for any shares
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